The decision of the world’s largest oil-producing nation to increase its production despite coronavirus stalling global oil demand led to a 30% drop in oil prices.
Photograph: Christian Hartmann/Reuters

Saudi Arabia’s oil price war has wiped billions of pounds from the market value of the industry’s biggest companies after oil markets recorded one of the biggest price slumps in history.

The decision of the world’s largest oil-producing nation to increase its production even as the coronavirus outbreak stalls global oil demand triggered a 30% drop in oil prices on Monday morning.

The oil price shock caused the UK oil giants Royal Dutch Shell and BP to lose more than £32bn from their combined market value within minutes of the London Stock Exchange opening.

In early trade, Shell lost a fifth of its market value, while BP’s shares plummeted by 27%, after the global benchmark oil price recorded its deepest fall since the Gulf war in 1991.

Industry experts fear that a prolonged oil price war could force companies to rethink their dividends and spell bankruptcy for smaller commodity trading houses.

By mid-morning, BP, which was valued at £79.5bn on Friday, was worth £63.6bn after its share price fell by about 20% to 322p a share. The value of Shell’s London-listed shares fell by more than 13% to about £13 a share, effectively wiping £16.8bn from the company, which is now worth £108bn.

On the FTSE 250, shares in Premier Oil plunged 51%, while Tullow Oil was down 26%.

Analysts at Redburn warned that a six-month price war could take a major toll on oil company earnings, potentially bringing an end to dividends in favour of paying investors in company shares instead.

Shell and the US oil giant ExxonMobil are considered the most exposed to the market crash because they have high breakeven oil prices. Exxon requires oil prices of about $74 a barrel to cover its costs while Shell needs $65 a barrel to break even, the analysts said. BP is relatively stronger, thanks to a $53-a-barrel breakeven oil price.

The impact of the coronavirus caused oil prices to tumble to a one-year low of below $50 a barrel last week, from almost $69 at the beginning of the year. However, Saudi Arabia’s decision to launch a price war against its oil rivals by ramping up oil production caused prices to collapse to $33 a barrel this morning.

The Saudi price war could drive oil prices below $30 a barrel for the first time since the 2016 oil price crash, according to market experts at S&P Global Platts.

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The Opec oil cartel, led by Saudi Arabia, had hoped to avert an oil market crash by cutting back oil production in line with falling demand. But talks collapsed on Friday after Russia refused to hold back its production. Over the weekend Riyadh outlined plans to ramp up oil production and sell it to key customers at a discount in a move that analysts believe is designed to assert its dominance in the oil market.

“All signs point to Saudi Arabia and Russia wanting to inflict maximum pain,” Shin Kim, at S&P Global Platts, said. “At the very least to instigate as fast a response as possible from US shale producers and each other.”

Bjørnar Tonhaugen, the head of oil at Rystad Energy, said the market volatility caused by Saudi Arabia’s “shock-and-awe strategy” may lead to “bankruptcies among trading firms” while others thrive.

Tonhaugen said: “Markets are driven by greed and fear but among these two emotions, fear is the again strongest.”